Ben Bernanke and the government will do everything within their power to fight deflation, because deflation would cause a domino effect of defaulting IOU’s that would absolutely destroy a debt based economy- like the one that we have.
Today the US has a gross domestic product of $14.6 Trillion dollars. Our debt level just passed $15 Trillion dollars and the deficit is growing by more than $1 Trillion per year, which means that we are officially bankrupt now, owing more than we make.
Now the big question: who’s buying all of this debt?
Well until recently, the biggest buyer has been China which today has around $3 Trillion in US holdings. But since 2009, they have been purchasing less and less and now they have begun to actually sell our debt.
So Japan stepped in and started purchasing more and more… well at least until the Earthquake.
But the #1 buyer of US debt since 2008 has been the Federal Reserve itself who is now purchasing up to 80% of all new debt issued. Without anyone else willing to buy
US Treasuries, the Fed is being forced to print new money out of thin air in order to buy the debt themselves.
The more they print, the more we own interest on. The more interest we owe, the more we have to print. And we, the taxpayers of the United States, are left holding the tab for every single dollar of it.
This is called “debt monetization” and it is the last desperate move a bankrupt institution can make in order to keep their Ponzi-Scheme going. This move has prompted the Standard And Poors rating agency to downgrade the US credit rating for the very first time in history from AAA to AA+…
But this is just the beginning.
In the coming months and years, the true state of our union will become clear to everyone and once that happens, it will cause interest rates on our nation’s debt to sky-rocket. This is no different than Amex raising the interest rate on your credit card debt. Stocks, bonds, mutual funds, and the anemic housing marketing would tumble, as borrowing costs for everything would climb sharply.
Should we default on our debt, it would lead to an unimaginable depression and a period of social and political upheaval unlike anything we’ve seen since the Civil War. If you think that sounds a little extreme, keep this in mind… Around 50% of the entire US work force today is employed by the government. If the debt ceiling isn’t raised, or the US defaults, 50% of working American’s will stop receiving their government paycheck. That includes everyone in the military, social services, judicial services, postal system, fire departments, EMS, and law enforcement to name just a few.
The bottom line is that too much debt got us into this mess, but we can’t let the balloon continue to deflate or it will shrink down to nothing and we’d fall into the next great depression. So the Fed’s only option is to keep raising the debt ceiling and continue pumping in more and more debt in order to stop the IOU dominos from falling.
With every dollar printed into existence, it decreases the value of the dollars already in the world. This process is called inflation.
